After the EU issue, and the environment issue, the economy comes next. For many people it may even come first, but anyway.
What is the present state of our economy? Has it improved over the past five years? What are the challenges it faces?
We will speak today macro-economically, that is the economy looked at globally, rather than micro-economically, which is what does it mean for you and me and the rest. We will look at the micro-economy next week.
In very much layman’s terms, our economy was growing quite well during the 1990s. Then three things happened almost all at once: the world economy slipped into recession, our country changed to consumer tax (VAT) and we had an election and a change of government.
So the government deficit, rather acceptable at Lm53.2 million or 27.3 per cent of GDP in 1995 slipped to a deficit of Lm105.6 million or 76 per cent of GDP in 1996. It increased to Lm146.9 million or 99.3 per cent of GDP in 1998 until it started to be reined back (despite a bad year, 2003 – another election year – when the deficit shot up to Lm185.6 million or 121.4 per cent of GDP, but that may have been because of the Dockyards issue, in other words a one-off) to 2006’s Lm54.7 million, which is more than the deficit reached in 1995 but percentage-wise, at 22 per cent of GDP, is actually less.
As any household trying to manage its finances as rationally as possible knows, the only way to improve your financial situation is by paying constant attention to the bottom line. And in country terms, the national bottom line is the deficit. Only by bringing the deficit down can a country improve its economy.
Over the past five years, Malta applied to join the eurozone, and last 1 January actually entered it. The famous Maastricht convergence criteria and the whole ECB regime focuses on inflation, another issue on which Malta managed to get in line, with the rather strict Maastricht criteria. By bringing down the deficit and controlling inflation, Malta undertook a very difficult dieting regime which, like all diets, must be persistent rather than stop-start, and the person who is doing it must in the end believe it will do him (or her) good.
Today, after all this strict regime, the state of our economy is better, far better, than it was in 2003. Joining the euro (forget the hype and the celebrations) is not so much a reward for having undergone the dietary regime but could have never happened without reaching these and the other criteria. As a result, today, we are not only better economically but also form part of a world currency rather than staying out on our own in a world where the waves of globalisation would have swamped us or forced us to 1980-type models of protectionism.
That this had to be done at a price goes without saying. That’s what governments are for: to take decisions in the national interest. It is still shameful to consider, as we have been saying these past few weeks, that ultimately it had to be EU discipline, in this as in the environmental field, to kick us into shape, as our political class is inclined to count votes first. Having said that, it is also due to the tough decisions that were taken earlier in the past legislature, by such unthanked people as Eddie Fenech Adami and John Dalli, that we have registered the improvement there has been. But in the end, yes, it was the increased tax revenues that enabled us to bring the deficit down. And, in the end, it was our taxes, yours and mine and the others’, which helped us make it.
As ECB president Jean-Claude Trichet said when Malta joined the eurozone, this is just the beginning, not the end, not an end in itself. As the Commission itself reported last Wednesday, when it issued its report on Malta’s Stability Programme, submitted last November and covering the period 2007-2010, Malta’s Medium Term Objective is that of reaching a balanced budget by 2010.
But the Commission itself was rather sceptical of Malta’s ability to keep to its stated targets. It said: “However, there are risks to the achievement of the budgetary targets, in particular due to the reliance on volatile tax revenue items in 2008; the recent decision to subsidise energy prices without compensating measures; the favourable macroeconomic outlook after 2008; and the lack of information about the underlying measures, especially as regards the envisaged continued restraint in the public wage bill.
“These may hinder the achievement of the MTO by the target year 2010. In addition, Malta’s competitiveness within the euro area may be at risk in the event of a departure from wage moderation in the public sector, which may spill over to the private sector. The reduction of the general government gross debt is planned to proceed at a satisfactory pace and is expected to fall below the 60 per cent of GDP reference value by 2009. In terms of the long-term sustainability of public finances, Malta is at medium risk.
“In view of the Commission assessment, Malta is invited to: (i) pursue further fiscal consolidation as envisaged in the programme so as to reach the MTO by 2010 and ensure that the debt-to-GDP ratio is reduced accordingly, by spelling out the measures supporting the planned consolidation, especially on the expenditure side; and (ii) enhance the efficiency and flexibility of public spending, including by accelerating the design and implementation of a comprehensive healthcare reform.”
These are very serious and important words which cannot, and should not, be shouldered aside as “just some other bumf from Brussels”. Such too would be the advice tendered by any economist worth his salt, or other international bodies such as the International Monetary Fund.
The national interest, in other words, calls for continuity of economic strategy and for continued insistence on keeping to the stated targets. The continuity, it should be emphasised here, is of targets rather than of people but the strategy MUST continue. Those, government or opposition or any of the new parties in this election, who want to unsubscribe from the strategy, openly or through subterfuge, or even through promoting policies that mean kicking us back to the days of high deficits, must say so. And it is the duty of the opinion leaders and university luminaries to clearly identify those parties or programmes that will mean putting the clock back. We exempt here the Commission for, naturally, it would not want to be seen or perceived as pushing one party against another, but there must be much shaking of heads in Brussels at what is being offered to the Maltese electorate and warnings should be clearly conveyed to the parties, even if out of public hearing.
We will state this possibly more forcefully next week: it is all well and good to give everyone a salary rise, but what about the national economy? Can you give people a salary raise on the faint promise or hope that the economy can be ratcheted up to four to six per cent growth? If businesses did this, they would fold in no time. Why should a country do any differently?
More. If we had any growth at all in the past five years, and growth there has been, sluggish at first but good enough in the past year or so, this growth could only be attained because we steadfastly undertook the virtuous road back to economic orthodoxy. Had we tried to get better or earlier growth without the euro, in other words without the Maastricht dietary regulations, we would have slipped even further back than we were. This is not rocket science we are talking about, just simple, plain and clear macro-economic commonsense.
Let us now examine in very succinct ways the various components of our economy.
GROWTH: Our sister paper, The Malta Independent Daily, last week revealed that Eurostat, the EU’s statistical arm, put Malta’s GDP growth in the third quarter of 2007 at 4.3 per cent, thus upgrading the previous provisional figure of 4.1 per cent. Apart from apparently resolving the controversy between NSO and AD and also GRTU on the deflators used, this puts Malta head and shoulders above the EU-27 average of 2.7 per cent growth in the third quarter. Our growth today comes from the financial services sector and from online gaming as previously it used to come from ship registration.
EMPLOYMENT: Recurrent figures show that we are now at almost full employment and this is further confirmed by the voices on the streets which also say that many of those registering for unemployment benefits are on some sort of fiddle and that almost anyone can get practically any job at almost any time. We have long been arguing for stricter checks on social security payments and unemployment benefits.
COMPETITIVENESS: Yet there is, as Labour has been arguing, scope for more growth still. The Competitiveness Comparative Report, as outlined some weeks ago, has seen Malta slide down in comparison to competitor countries. The reasons are clear and they tally with GRTU’s arguments that what fuels inflation are mostly government-induced costs, red tape and bureaucracy. This is what should be tackled, not just cost over-runs and project delays about which Labour has been loudly complaining.
CURBING GOVERNMENT EXPENDITURE: It is amazing that the two main parties are all overflowing with so many plans to spend more here, there and beyond but not one of them seems to be taking any notice of the advice coming from the Commission (and from the IMF, the World Bank et al) to cut expenditure. Only Philip Beattie from Azzjoni Nazzjonali makes this kind of argument, and even then it hardly figures in AN’s proposals. The government has not really allowed its own creation, the special unit within OPM, to do its work. And we are still without a new Auditor General: blame Labour for that.
INFLATION: Isn’t it curious how, after all that hype about perceived inflation with the coming of the euro, all the noise seems to have died down and nobody seems to be talking about it now? It’s either because it did not happen, or because everyone has seen that there is nothing anyone can do, because it is rather stupid to keep paying these fractions of euros. The government’s plan to turn what’s left of NECC into a consumer protection agency is as ridiculous as Labour’s plan for a watchdog. The euro inflationary spiral just has to work its way through the economy. At the same time, keeping inflation down must remain one key government (and Central Bank) objective.
TOURISM: We have finally seen the light and turned the corner. This paper, and others, had to struggle and fight against huge government resistance to the introduction of low-cost airlines but at last we are now seeing the results. The Labour government of 1997 thought that by improving the product (in that case, Bugibba), tourists would flow in. Give it 10 for effort, two for results. What was really, really important and overdue was to open up more and more access to Malta, through more flights from more points. There is still room for more improvement, as this paper’s readers have seen over the past few weeks. At the same time, the product must improve, and this time not just the Bugibba promenade, but mainly the privately-owned hotels left without refurbishment for years on end, and the way tourists are treated. What is lacking is: enforcement on everyone, but especially timeshare touts, and all those who come into contact with tourists.
MANUFACTURING: Labour is still in its MDC mode, little realising that the world and Malta have moved on. There has been an astounding turnover in the manufacturing sector in Malta (though Austin Gatt’s wager that manufacturing in Malta was doomed was in bad taste and shown to be an exaggeration by his own successes in the field – from Lufthansa Technik to the Freeport, from SmartCity to pharmaceuticals). We have shed low-end textile industries and taken over high tech ones.
CONSTRUCTION: We have already spoken about this sector last week and reiterate that even if it is today a mainstay of the local economy, there should be a national debate on capping it for the benefit of our quality of life.
AGRICULTURE AND FISHERIES: This is a sector in danger of extinction. We have often pointed out that the crisis will come when the subsidies allowed by our Accession Treaty run out (next year) and the small farmer gets gobbled up by the big importer. It is our stated view that the government has mishandled the whole sector and that today only a few in the sector are able to withstand the flood of imports. Labour could have had a field day here, but it has let its ammunition get damp.
THE DOCKYARD: Predictably, the dockyard issue is still with us and, equally predictably, Labour has once again allowed it to cloud its vision. The solution is definitely not to try and extend State subsidies after the end of this year, much like Lech Kaczynski in Poland. The people at Malta Shipyards had their chance and many taxpayers, including ourselves, object to paying more of our taxes to keep low productivity and outdated work practices alive. And we object even more to Malta’s good name in the EU being spent on such a retrograde issue.